Taking a Look at the Different Types of API Business Models
Nany have come to recognize APIs as important business assets. So, we'll be taking a look at different types of API business models.
Now that our digital economy is largely API-driven, many have come to recognize APIs as important business assets. But one thing that’s probably not clear to the average user is how APIs make money. What are the different strategies that businesses use in order to profit off of APIs? Who pays for API services, and at what rate? Knowing the answers to these questions is important if your company wants to earn off of APIs. The great design work done on an API, like on a hosted toolset like Stoplight, will count for more if the API is monetized properly. In this article, we’ll be taking a look at different types of API business models.
To that end, this article will help stakeholders learn about how APIs make money and how APIs are marketed to different sectors. It will walk the readers through the different API business models and how they work. The first part of this article discusses business models in relation to their monetization scheme. The second part details the approach to market APIs in accordance with a particular purpose. Read on to learn more about making money with APIs.
API Business Models According to Type of Monetization Scheme
The easiest way to learn about how APIs are monetized is to look at the different monetization schemes. It should be noted that certain companies, like Facebook or Instagram, allow the general public to use their APIs for free. But most other businesses make money from APIs through the following methods.
The Developer Pays to Use the API: Types Of API Models
In this fairly straightforward business model, the API earns from developers who pay to use it. Under this scheme, developers are also charged to the extent that they use the API’s services. Prices are determined in the following ways:
- Pay-as-you-go basis, where developers pay only for the services that they want and according to a defined pricing plan
- Tiered pricing, where developers pay for tiered features and where the options get better the more they pay
- Freemium basis, where developers can use a free version of the API with basic features and have to pay for additional ones (much like free mobile apps that require payment for add-ons or ad-free versions)
- Transaction fee basis, widely used by payment APIs, where developers pay for a certain percentage of the transaction amount that happens on the API
The Developer Get Payments to Use the API
In some cases, however, the developer receives a financial incentive for using the API. Thus, instead of through the developers themselves, the API company makes money off of the following:
- Customer referrals made by developers
This monetization scheme is a great way for an API company to get loyalty from developers. Indirect Methods of Monetizing the API
Lastly, companies can earn money not from the direct production of an API, but the use of API technologies for the following purposes:
- Content acquisition or syndication
- Software as a service (SaaS)
- Internal use
The Different API Business Models According to Purpose
Another way to classify API business models is by their purpose or the “hows” that guide their profitmaking. These can be down into five approaches.
Selling the API as a Business Function
In this business model, a company markets its API to a client business in order to help them achieve core business functions. The API can be to a completely new service that the business needs for its website or mobile app. It can towards improving a business process that already exists. Thus, the API company’s mode of sustaining a business is by earning from its client enterprises.
Selling the API as a Product
An API company may also employ a direct charging scheme for its API. This is common for API companies whose primary market is individual developers. The latter are either flat fees or monthly fees for the use of the API.
Selling the API’s Additional Services
As a variation to the item above, the API company can base its earning strategy on upselling additional API services. This is often the approach for freemium API versions with basic features. Companies that do this have to persuade users that the additional features are worth paying more for.
Using the API as a Marketing Tool: Types Of API Models
In this model, although APIs are not front and center in a company’s revenue generation plans, they serve as a secondary means of monetization. The APIs can help bridge customers to the company and entice them to use the company’s primary products or services.
Using the API as a Strategic Partnership between Other Businesses
Lastly, APIs can help businesses earn money from lucrative tie-ups with other businesses. The profit comes not from providing new data, but handling the data of other enterprises. This kind of business-to-business (B2B) arrangement may help a company build trust among customers and within its industry.
Conclusion: Building Business Value with API Technologies
There are different business models that companies can employ in order to monetize their APIs. The best model, however, depends on the company’s particular business goals.
May you choose the right model for your own business—and get the best profit margins as a result!